March 25, 2008
How To Identify New Trends When Trading Forex
When trading forex your ultimate goal is to enter a position at the start of a trend and exit profitably at the end of the trend. Of course very few people ever fully achieve this goal and neither should you aspire to, as you'll do more than okay trading the middle part of the trend, so today I'm going to discuss how you can spot that a new trend is under way.
The most common way to identify new trends is through indicator crossovers. These include some of the most common technical indicators such as MACD and moving averages.
For example a MACD crossover often signals the start of a new trend as does the occurrence of a shorter term moving average crossing a longer term one, like the EMA (5) crossing the EMA (20) for instance.
Similarly the TRIX indicator is another useful indicator that I use a lot myself to point out new trends are under way. For example, just today the TRIX (15,9) crossed upwards on the 4 hour chart of the GBP/USD pair during the 0.00 bar earlier today and is now approximately 100 points higher at the time of writing.
Two other indicators I like to use to identify new trends are the Supertrend and ADX indicators.
The Supertrend was designed specifically to signal change in trends so works extremely well as you would imagine, and the ADX is also a powerful indicator because whenever it crosses upwards through the 17 or 23 level (I use 20) it signals a trend is under way. You can also use the DI+ and DI- lines within the ADX indicator to signal the direction of the trend.
All of these indicators can provide you with very profitable signals particularly when they are in tandem with each other, and as always the longer time frame you use the more effective they are.
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